Doing the Math on Obama's Detroit Bailout

Posted by: David Welch on August 2, 2010

President Obama served up red meat for his hard-core supporters in Detroit yesterday, proclaiming that the government’s bailout of General Motors and Chrysler to be a success. Had he not intervened and invested in the two companies, Obama said, they would have fallen into liquidation and 1.1 million jobs would have evaporated. In the past year, the auto industry has regained 55,000 of the 334,000 jobs lost, he went on. “The fact that we’re standing in this magnificent factory today is a testament to the decisions we made,” Obama said while visiting Chrysler’s Jeep Grand Cherokee plant in Detroit. His comments were aimed clearly at the critics on the other side of the political aisle who opposed the bailout 18 months ago and who still criticize government ownership of GM and Chrysler to this day.

So far, it is tough to argue that the bailout hasn’t worked. GM is in the black, having reported an $865 million profit in the first quarter with black ink looking likely for the rest of the year. GM’s results are strong enough that the company is preparing for an initial public offering that should start selling stock in November. Chrysler is at least making an operating profit, which puts the company in much better shape than most analysts thought it would be a year ago. With much lower costs, both companies should be able to make money going forward. Let’s not forget that GM, Chrysler and cross-town rival Ford cut out 2.9 million cars worth of production capacity during the crisis, according to the Center for Automotive Research. That was a quarter of capacity in the U.S., Canada, and Mexico. Cutting out the fat has allowed them to post profits even though sales are slow.

The real test will be if the government breaks even on its investment, or at least comes close. Obama Administration officials say they are hopeful that the taxpayers will be paid back in full. GM got $49.5 billion from the feds and Chrysler took $10.8 billion. For the government to break even on GM, the company must be worth at least $66 billion, and even more if the bondholders and United Auto Workers union exercise warrants and dilute the government’s investment. But nearly breaking even would still be an accomplishment. Here’s what I mean: Based on where GM’s bonds trade, the company is worth about $53 billion right now. That would be an 80% pay back on the government’s investment if GM’s stock were so valued. Stock in GM will be more liquid than its current bonds, so it should be worth even more, analysts say. But for the sake of argument, assume an 80% recovery on the $60.3 billion direct investment in GM and Chrysler. That would leave $12 billion unpaid. Would that be a reasonable price to save two industrial icons and hundreds of thousands of jobs? I would have taken that deal in the depths of the financial crisis, and I wager that most critics would have, too.

Reader Comments

Hugo van Randwyck

August 2, 2010 1:22 PM

I don't believe 1.1 million jobs would have been lost - they would have shifted to the other transplant manufacturers, minimal net job loss. It is good that the Big 3 are finally running their North American operations as a business, got rid of the 'jobs bank'. There is a good case for helping them, and that is to ensure more competition in the American market. It is still early days and the UAW needed to see bankruptcy before it could see sense, and there is still the issue of hourly costs being higher than the transplants, this could be useful in future articles, to compare, how much has really improved. Good luck to them, the more competition the better.

Daniel

August 2, 2010 1:40 PM

You gloss over something extremely important--the bail out has not worked for American workers or taxpayers. GM used the bailout to hire overseas--they employ almost as many Chinese as Americans now and sell more cars in China than the US. Using the bailout to export jobs was not what taxpayers had in mind.

David

August 2, 2010 7:33 PM

If they sell more cars in china than in America then it makes sense to hire more Chinese workers. The jobs should be localized to the markets in which they sell. Many Asian auto manufacturers hire and have plants in the U.S. which is their primary market. Do you suggest that these jobs be relocated to Asia? Multinational corporations have to operate on multiple fronts to maximize profits, which can be reinvested into expansion. If we expect the big 3 to solely hire american, then they WILL fail. The same goes for Hyundai or Toyota.

donald gotshalk

August 2, 2010 8:08 PM

For a measly 60 billion we saved a million jobs. Like nobody would make autos anymore.
How is Ford doing without any of that measly 60 billion. How many workers have they fired. How does their future look in comparison to GM and Chrysler. I sense it is early to tell. What if Chrysler and GM fail after a few years and Ford is extremely successful? Do we come up with another measly 60 Billion. Oh what the hell. 60 billion here, 60 billion there. Just tax the rich, blame it on Bush, keep helping "hard working families"and create another million government jobs. I'll bet anybody would take that deal.

Suneel Sawant

August 2, 2010 8:22 PM

There is more than iconic names at stake. Jobs, the US as an industrial leader, families, and technology. It was money well spent and will come back to us quickly. – Suneel Sawant

Joe

August 2, 2010 8:54 PM

Not only were GM and Chrysler jobs saved but also the jobs at all of the suppliers.

Remember the day when true Americans were proud of American car companies?

Joe

August 2, 2010 8:59 PM

Also, it was announced on Friday that Chrysler will not only keep a plant in Michigan open but will also add a second shift of 900 workers in a year's time.

This increase in production will be accompanied by 500 more jobs at suppliers.

More jobs sounds like a good thing.

Failed Bailouts Redux

August 2, 2010 10:14 PM

Forget the short-run accounting....Bail-outs of GM and Chrysler have only stifled innovation and guaranteed more stagnant mediocracy and bad management in the future. GM's $41,000 Volt is the kind of overpriced, under-performance to expect from sub-par innovation. Remember the K-cars from Chrysler? Next time, let the badly-managed auto companies fail, and the US auto industry will see a rebirth of innovation and actual improvement. Use the government funds to retrain and relocate labor, not reward failed management practices. Chrysler failed in the 80's and got a government bail-out. Now, 30 years later, Chrysler does it again. Who's dumber: Government or Chrysler???

Chad

August 3, 2010 11:50 AM

I will never believe that any bail out actually stimulates the American economy, especially in the automotive sector when manufacturing efficiency has been mastered by the Asian manufacturers (notably Japan, Toyota) and where the exporting of jobs is the first step taken to help the bottom line.

This is an insightful article, but a ton of skeptics are still ranting about how, when, and IF GovernmentMotors really wants these firms to make money. They'd love to governmentalize the industry and ruin that along with health care, social security, etc etc.

I'm about to buy a Chevy so there's my stimulus!

Hugo & Daniel WRONG

August 3, 2010 10:51 PM

Sorry Guys, you both got it wrong! First, had the government not bailed out GM and Chrysler there very likely would not have been someone who stepped in and purchased the companies whole. Rather, both companies would have been liquidated and all of the plants and people would have been idled or outright let go. Given the oversupply of vehicles and the spare capacity of foreign auto makers the loss of American made cars in the US market would have spurred the foreign companies to ramp up production in their own countries rather than purchase plants in the US. Secondly, the US has never had much luck at exporting (other than to Canada) vehicles assembled in the United States to markets like China, Brazil, Europe and even Australia. Rather the US makers have always opened plants abroad to meet demand in those markets. The failure of especially GM would likely have resulted in the sale of GM's plants in those markets to companies that are not US-owned and thus any profits made in those countries having no chance of being repatriated to the US and America's balance of trade ever more towards China (an others). America stood to lose big time had the government not stepped in. Finally, ask yourselves what would have cost in terms of lost taxes paid by workers who would have been laid off? How much money would have been paid out in unemployment benefits to laid off auto workers? If the government gets close to break-even its a big win for all of us.

Ryan

August 3, 2010 10:55 PM

Time will tell. My guess is that history will look on this episode as controlled decline of a dying industry at best.

This being the "Auto Beat" I would not be surprised if this kind of comment is not published, but therein lies the problem. The auto industry has it's head so far in the sand that it fails to notice that the rest of the world is waking up to the fact that personalized automobile transport for the masses is causing more problems than it solves. Pushing autos in China and India will just accelerate those problems and the eventual demise of the automobile industry and its roadworks pork-barrel groupies.

The only transport that can take the human race forward on this planet, and not backward, is transit.

KENI

August 3, 2010 11:53 PM

Hello Mr Daniel, we would appreciate it if you could get your facts straight and stopeed posting inaccurate talking points.
The bail aout has been a success so far. The jobs if they were lost would not have easily transition into the other auto manufacturers given that there was barely any hiring going on in the industry at that point.
GM is making more profits in China than they are making in the U S now and given that they have manufacturing facilities why not ramp up production there?
If GM had failed there would have been a ripple effect through the economies of states where they have facilities and through the automotive parts supply chain. This in turn woulf adversely affect the cost structure od ather players in the auto industry.
We tend to quickly rush to castigate the UAW but fail to apportion blame to the management who made all the descisions starting from the 60s which eventually sank both companies.
The companies are starting to design and manufacture cars which are on par with the competition so their future prospects look brighter. the current trend of streamlining designs from their studios all over the world is a positive step which would enable them cut production costs further and come up with competitive designs. The Big three are now global entities but there is still a need to preserve a local manufacturing base and knowhow here in the good ole U S of A.
The tried and true way of recovering from economic depressions is for governments to increase spending in their economies which more often than not entails increased government spending. Lastly we are all to blame for the crises and should let go of that popular and distinctly American past time of looking to heap blame for living beyond our means on others.

tired of the waste

August 4, 2010 12:27 AM

Obama has a team that will lie just like him, I will never buy another GM or Chrysler product NEW OR USED

Ever! and will make damn sure my kids do not, even if I have to help pay for the another choice for them, in fact I just got my daughter to purchase her fist new car, it is a Toyota, that is the FIRST foriegn owned auto this fmaily has ever bought,

I am sick and tired of waste from our corporations and then for the so called leader of this country to have the taxpayers bail them out just made matter worse, and why did they do it?? to have GM build a 41,000.00 dollar electric car? what a joke! GM is a laugh! Obama is a fool!

Change what a lie! he has made it so I will never EVER vote for ANY democrat again!
EVER

Thomas

August 4, 2010 8:15 AM

how did the bailout work? they filed bankruptcy, something they could have done with or without the tens of billions of tax payer dollars.

mjw149

August 4, 2010 9:52 AM

The bailout preserved a strong foundation for our economy. Keep in mind if Ford was the only full size manufacturer in the US, all the foreign carmakers would be able to charge more, take that money overseas, and eventually pick up their factories and move them back overseas, too. The jobs absolutely would have been lost forever, AND we would be paying more for everything. As it stands, GM and Ford's philosophy is to charge more for smaller cars. We really need a gas tax in this country to make that work, and to encourage public transport, which is another way of keeping money in the US, out of the middle east and out of the automotive axis (Germany, Italy and Japan). How deliciously ironic, really.

ps

August 4, 2010 9:16 PM

Actually the bail out has worked out. The cold human devoid calculation here shows a $12 billion deficit... the psychological impact or political impact can not be measured in pure dollars and cents. The Midwest would have been gutted whether a chapter 7 or chapter 11. The other part is the new management so far has started to point these ships in the right direction.

tom

August 4, 2010 11:29 PM

They will not be shifted to other transplants. Because the transplants were/are undercapacity.

paul

August 5, 2010 7:05 AM

What about the losses to the initial stockholders of GM? I understand that they were eliminated. How would the math work if those losses were included?

Competitive Cars

August 5, 2010 9:07 AM

You will never truly know whether GM and Chrysler would have gone under, if Obama hadn't bailed them out. But I can see the point of Daniel though, if it was meant to help the American people and they are hiring Chinese,that isn't helping America at all. The jobs should have stayed in America not gone overseas.

terryreport com

August 5, 2010 10:22 AM

Had Obama not stepped in to help the car companies, he would have been criticized from the right for not having the "courage" Bush showed by bailing out Wall Street. The collapse of these two companies would have created a serious, dark cloud over America and our economy, which would have made coming out of the recession all the more difficult. On the morning when these companies were no longer in business, we would have looked ourselves in the mirror and said, "What happened to America?" These companies, in many ways, represented the foundation of American prosperity through the 20th century.

Yet, we are missing the longer term benefits of the rough justice that could have been administered to them and to the economy. Ford probably could have taken over parts of GM. Foreign companies would likely have swooped in to feast on the bones of both. Perhaps Penske, which wanted Saturn, could have taken a major share.

Is it possible that new car companies could have been born, without the backward looking mindset of GM and Chrysler? We will never know.

Doug Terry

wiseguy

August 5, 2010 12:26 PM

On top of what the above two posters said, what about the interests on the two bailout. Since GM and Chrysler took $60b, assume a very modest 5% over 2 years (extremely optimistic), it amounts to another $12b loses for the taxpayers.

Furthermore, what about the moral hazard that the bailout caused?

In short, Obama exercised an extremely bad judgement (probably corrupted by democratic union tie) to bailout GM and Chrysler.

Doc

August 5, 2010 1:02 PM

Did the bailouts make GM and Chrysler more innovative? Did they bring efficiency to operations? Did they eliminate wasteful spending? NO on all counts. The bailouts did nothing but allow inefficient business continue to operate inefficiently.

The government should not be involved in deciding which businesses get to survive or not. The marketplace will handle it just fine. By preserving millions of under-productive, overpaid jobs, the labor market is weaker in the long run, and innovative industries, which could help bring the economy out of recession, are damaged since they have to compete for artificially tighter resources.

Paul (Vw)

August 5, 2010 1:55 PM

"So far, it is tough to argue that the bailout hasn’t worked. GM is in the black.."

If you narrowly limit terms of success to something like that, then perhaps you can claim "success."

Keep in mind that the so-called "critics" may not define success as a transient bookkeeping status. Dropping helicopters of tax-payer money on a poorly run industry to put it (for now) in the "black" does not mean those companies are any better run or their products will score any higher on Consumer Reports.

One of the strengths this country used to have is the predictable application of laws in business. Would you want to invest in Venezuela only to have Chavez nationalize your assets on a whim? Investment will flow to areas that are business friendly... such "friendliness" includes fair and consistent application of the law without bullying from a president.

US bankruptcy law exists for a reason and it worked fairly well (though not painlessly). To have a president stoop to vilifying legitimate owners of stock, forcing them to cower and surrender their rights so their assets can be transferred to unions...that may be a "success" to some I suppose.

By the way, Ford didn't take bailout money and seems to be doing pretty well. If I were to buy a domestic car, it would be a Ford.

charlie gross

August 5, 2010 4:50 PM

How much money did bond holders, banks, and sotckholders lose in the government takeover? When the cost of saving the auto industry is tallied, please include all of the dollars.

Bekki

August 5, 2010 6:23 PM

America wants their money back with interest. We would all love to have their levels of retirement benefits, subpay for not working, and not have to cover their unfunded liabilities (such as those car warranties, retirement benefits and world class health care). Our retirement accounts are less due to the bond default! GM won and we all lost! Crysler was mostly privately owned so they won big time!

Pilau

August 6, 2010 2:39 PM

Ah! Simplified mathmatics at it's best. No accounting for unemployment benefits,medical cost, psychological cost, long term cost to the economy and the nation. If life could just be that simple.

Jon

August 12, 2010 6:16 PM

It seems every Republican post hates the bailout for idealogical reasons, not factual ones. Bush/Paulson did the initial bailout of the car companies, which was continued by Obama. Same with Tarp. The fact is the economy was in free fall and the failure would have resulted in huge collateral losses beyond just the car companies. Bankruptcy was going to be a liquidation, not a restructuring because the companies needed massive new equity which only the government can provide. Its nice to say that the government should never step in to the private sector as a principal, but the fact is that there are certain extreme cases where it is necessary. If you can make the argument taxpayers would have lost LESS money without the bailout supported by facts, then you should be against it. But the facts point otherwise, and angry political/idealogical arguments are not persuasive.

The Loud Talker

August 26, 2010 3:34 PM

JOn, you said "Bankruptcy was going to be a liquidation, not a restructuring." How do you know that? The reason the government stepped in was specifically to save UNION jobs. If true bankruptcy had been allowed it would have made all union contracts null and void. We coudn't have that now, could we? Those same unions whos antiquated pensions and ridiculous wage demands were gas on the fire of bad management decisions should not have been saved.

GM would have survived. We didn't need to give GM $60B to cut costs when it could have cut costs on its own.

pjkPA

December 29, 2010 10:33 PM

The Taxpayers just gave teachers unions another 60 billion for their pension funds... that money you will never see again. GM is paying back the loans it got and is buying back the governments interests in the company. Heaven forbid that teachers may have to pay something for medical expenses.

No one cared when millions of steel workers completely lost their pensions but it seems government jobs are just too important.

This is just more tyranny.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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